March 28 (Bloomberg) -- Six men charged in a scheme to tip
off traders to communications on internal brokerage “squawk
boxes” reached deferred-prosecution agreements, the government
said.

Assistant U.S. Attorney James McMahon announced the deals
today in Brooklyn, New York, federal court, marking the end of a
seven-year-long effort by the Justice Department to prosecute
“front-running,” or trading ahead of market-moving orders.

In the case, former brokers at Merrill Lynch & Co.,
Citigroup Inc., Lehman Brothers Holdings Inc. and Smith Barney
were accused of conspiring with employees at day-trading firm
A.B. Watley Group Inc. to use order information transmitted on
“squawk boxes” for front-running.

The deals were reached after a Manhattan federal appeals
court reversed the men’s convictions in August, finding that
prosecutors had withheld critical evidence.

“The government has entered into deferred prosecution
agreements with each of the six defendants,” McMahon said today
to U.S. District Judge John Gleeson. Under the deals, the men
face waiting periods ranging from six months to five years when
the charges against them could be revived if they engage in
other crimes.

Other Conditions

The charges would eventually be dropped if defendants meet
the conditions of their agreements, attorneys said. Some
defendants face other conditions under separate deals reached
earlier with the U.S. Securities and Exchange Commission.

The men were first tried in 2007 on securities fraud,
conspiracy and other charges. A jury acquitted them of 20
separate securities fraud charges, remained hung on a conspiracy
charge and convicted one of the defendants, former Merrill
broker Timothy O’Connell of witness tampering and making a false
statement, according to the appeals court’s ruling.

In a second trial in 2009, a jury found the men guilty of
conspiracy to commit honest services and property fraud,
according to the ruling.

The appeals court said that prosecutors failed to disclose
until after the trial 30 deposition transcripts taken by the
SEC, some of which would have supported the defense of ex-Merrill Lynch and Smith Barney broker Kenneth Mahaffy Jr. and
others. Turning over the materials was required under the U.S.
Supreme Court’s ruling in Brady v. Maryland, the appeals court
found.

‘Should Have Dismissed’

“The government should have dismissed the case,” Andrew
J. Frisch, a lawyer for Mahaffy, said after the brief hearing
today. “It should never have been brought in the first place.”

Prosecutors alleged that the brokers helped the Watley
traders gain an edge by holding their phone receivers up to
their squawk boxes, which carried notifications about major
customer orders that could move the markets. The traders could
then buy or sell shares before the larger deals made an impact
on prices.

The information on the squawk boxes was confidential and
should not have been acted on by outside parties, prosecutors
alleged in court filings.

To return the favor, Watley traders placed “wash trades”
with the brokerages, buying and selling the same security at the
same price and paying commissions, which essentially amounted to
bribes for the brokers, according to prosecutors.

Lehman Broker

Along with Mahaffy and O’Connell, defendants who reached
deals with the government included former Lehman broker David
Ghysels Jr.; Keevin Leonard, former Watley supervisor of
proprietary trading; Linus Nwaigwe, a former Watley compliance
director; and Robert Malin, the former president of the day-trading firm. Each had been sentenced to prison.

Prosecutors said in a February letter to the court that
they had reached agreements with four the defendants and were
working on a fifth. At the time, Malin had not yet made a deal,
according to his attorney Roland Riopelle.

The deferred-prosecution agreement was “a favorable and
fair outcome for Mr. Malin,” Riopelle said in a phone interview
today. “I think he’s relieved.”

Donna Newman, a lawyer for Nwaigwe, Thomas Dunne, a lawyer
for Leonard, and Susan Wolfe, a lawyer for Ghysels, didn’t
immediately return calls for comment. Marshall Miller, head of
the criminal division of the Brooklyn U.S. Attorney’s office,
declined to comment.

The case is U.S. v. Mahaffy, 1:05-cr-00613, U.S. District
Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story:
Christie Smythe in Brooklyn, New York, federal court
at csmythe1@bloomberg.net.